Special Disaster Distributions Allowed at a Preferential Tax Rate from Retirement Plans

Pursuant to Internal Revenue Circular Letter CC RI 20-09 (“the Letter”) eligible individuals can make withdrawals from their qualified retirement plans or individual retirement account, as a result of the earthquakes at the beginning of 2020, to correct any losses or damages suffered by such earthquakes, as well as extraordinary or unforeseen expenses to cover basic needs (“eligible expenses”). These eligible expenses will also include those incurred to assess the condition of the real estate property and those to repair such property to comply with the current construction codes.

As established in the Letter, the eligible individual can withdraw the first $10,000 without any tax due. Furthermore, the person can withdraw 90,000 additional dollars subject to a preferential tax rate of 10%. In order to be eligible for the 10% rate, it is required that a 10% withholding is made to such payments in excess of the exempt amount. If the withholding is not made on such amounts, then they would be taxed at regular rates. Please be advised that to be considered as an eligible individual, the person has to be a resident for the entire year 2020.

The withdrawal must be requested by filing a Sworn Statement (“the Statement”) between February 20, 2020 and June 30, 2020. The Statement must include name and address of the person, a certification that the person will be a resident for the entire year, certification that the taxpayer is not withdrawing amounts in excess of the authorized thresholds, amount of damages suffered and other compliance certifications. The payor has to request the Statement but is not required to corroborate its correctness.

No penalties would be imposed under the PR Code due to early withdrawal, but you need to verify with your financial institution if they impose any administrative penalty for the early distributions.

Please contact us for additional information or assistance.